RISING RATE ECONOMY

THE RISING RATE ECONOMY IN AN ALREADY HOT HOUSING MARKET

By Daniel Herrera

Interest rates have steadily gone up since the end of 2021. With the current lack of control on America’s inflation, The United States Federal Reserve Bank (FED) has recently increased rates by half a point, the second consecutive rate increase and biggest rise in borrowing cost since 2000. Current economist forecasting predicts that rates will continue to increase and eventually stabilize; but when will that happen? The continual increase in the cost of money has substantially decreased the consumers ability to purchase in an already hot real estate market.

The burning question every buyer has is: When is the BEST time to buy a home? The Simple answer is: YESTERDAY. Unfortunately, no one has full capacity to predict the uncertainty and volatility of the Housing Market and throw in the government’s fiscal policy along with the FED’s decision making, its impossible to determine the right moment. What a buyer can control is their capacity to purchase.

Over the past two quarters, a buyer’s purchasing capacity has decreased due to the nature of the rising rates market. A 3.00% mortgage on a loan of $400,000 would cost a buyer $1,686.42 monthly. Today, the same loan amount hits the bank account for $2,271.16 if you secure a 5.5% interest rate. The price on “waiting” six months to purchase a home can be quantified at the amount of $584.74 monthly.

Over the past year, the typical home in Las Vegas has appreciated approximately 33% bringing the average home cost to around $431,500. If a qualified buyer waited for a “Market Slowdown” or “Bubble to Pop” over the past couple of years, that wait potentially costed them over $100,000 in home equity appreciation. A home loan is amortized over 30 years and should be treated as a 30-year investment. Mortgage rates will continue to fluctuate up and down and a consumer should ALWAYS take advantage of lower interest rates. The Average American resides in their home for 13 years and a lot can change over that time. The home loan a consumer establishes at the purchase of their property is almost never the same loan they have once they payoff or sell their home. If throughout the duration of your home ownership interest rates drop, a refinance of the current loan might make sense. Although cost will be incurred and terms will change, the refinance transaction is a tool that can save you a substantial amount monthly.

As a consumer, one can simply Stay Ready. Multiple factors go into the qualification process of a home loan and we are only in control of a few. As a consumer, its our obligation to ensure that when the time comes, all controllable factors are where they need to be. Maintaining good credit and capacity to repay borrowed money is simply the beginning. Understanding the comfort level of maximum monthly expenditures also helps a consumer fully understand their own capacity. When all the numbers make sense, that is when a buyer will truly feel that they are ready to Buy a Home.

As a consumer, we shouldn’t wait. If we have the capacity to buy our own home, the right time will always be; Yesterday.

Daniel Herrera is the Branch Operations Manager at Residential Bancorp. He can be reached at 714.878.3112 or daniel.herrera@bancorp.com.